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Chapter 8 > Stocks and Bonds in General

Stocks and Bonds in General

Bonds generally are poor investments in an inflationary environment. If their coupon was set under better conditions, interest rates have almost certainly risen far beyond the coupon rate, which means the price of the bond will fall. (Bond prices move inversely with interest rates, so that the coupon rate, which does not change, produces a market yield. If rates rise from 5% to 10% due to inflation, a bond paying a $50 annual coupon will fall in price from $1,000 to $500 so that its yield rises from 5% to 10% to conform to the market.) The longer the duration (years to maturity) of the bond, the farther its price will drop as inflation accelerates. In a time of rising inflation, your fixed income investments should have short maturities so....


  

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